São Tomé and Príncipe’s economy is experiencing strong imbalances and slower growth; Reversing large deficit spending of 2018 and implementing comprehensive structural reforms in energy and tourism sectors are needed to unleash the growth potential; Significant progress was made in the discussions on the economic policies and reforms that could be supported by a new IMF arrangement.

A staff team from the International Monetary Fund (IMF) led by Xiangming Li visited São Tomé and Príncipe during March 20-April 4, 2019 for discussions on a new program supported by the IMF’s three-year Extended Credit Facility (ECF) arrangement. [1] At the end of the visit, Ms. Li issued the following statement:

“The new government and the mission made significant progress in the discussions of the economic policies and reforms that could be supported by a new IMF arrangement. This proposed program aims to improve internal and external balances through restoring fiscal sustainability and enhancing macro stability, which are essential for a conducive environment to boost inclusive and robust growth.

“Progress under a program that expired at end-2018 was limited. Preliminary data show that central government debt declined by 10 percent of GDP during 2015-18. However, the state-owned utility company, EMAE, accumulated losses and arrears of an almost equal amount. Consequently, consolidated public debt, which includes EMAE’s debt, declined by only 2 percent of GDP. The tax-revenue-to-GDP ratio decreased to 12.5 percent, significantly below the average of the region (about 16.0 percent). Meanwhile, some structural reforms advanced, including regularization of the government’s arrears to ENCO on oil price subsides, establishing an automatic fuel price mechanism, and developing a Management Improvement Plan and a Least Cost Production Plan for EMAE. Overall, progress was limited due to low capacity, delayed implementation of reforms, and policy slippages, particularly during the election years of 2016 and 2018.

“The economy is currently experiencing strong imbalances. During 2018, the domestic fiscal deficit widened significantly. This, along with lower external inflows, contributed to a drop in international reserves by about $16 million (1.4 months of imports of goods and services). Growth slowed to below 3 percent of GDP, aggravated by electricity shortages, while inflation picked up to 9 percent at end-2018, driven by the higher prices of fuel and locally-produced fish and vegetables.

“The mission welcomes the government’s commitment to placing public finances on a sustainable footing by closing the large gap between revenue and expenditure, which is essential to rein in inflation and relieve pressure on the country’s international reserves. Recognizing the importance of protecting essential social services such as health, education, and the social safety net for the poor, as well as the need to improve and maintain infrastructure to support development, the authorities plan to prioritize spending carefully given limited resources. Supported by the World Bank, the authorities are implementing a social program with a conditional cash transfer component, which is expected to reach 91 percent of extremely poor households.

“To generate adequate funding for priority spending, they also plan to broaden the tax base and ensure equitable tax burden-sharing by curtailing tax evasion. In this context, they plan to introduce a VAT, which will replace some current taxes and broaden the tax base and will not affect low-income households significantly.

“The mission discussed with the authorities other measures to enhance external and financial stability and boost international reserves. A new payment system allowing credit card payments is being developed, which will stimulate tourism and raise foreign exchange receipts. The mission encouraged the authorities to tighten monetary policy to incentivize more dobra savings and ease the pressure on international reserves. The government also plans to strengthen banking supervision to enhance financial stability and remove structural bottlenecks that hinder efficiency and financial inclusion.

“Over the medium term, comprehensive structural reforms are needed to unleash the country’s growth potential. In particular, rehabilitating EMAE to cost recovery over time is key to ensuring the country’s energy safety, as EMAE currently can only pay a fraction of its imported oil supply. In addition, reliable, low-cost, and increased supply of electricity is essential for economic development. To fully capture the potential of tourism, the government plans to develop fisheries and eco-agriculture to expand the local supply chain. As part of the effort to meet the Sustainable Development Goals and support private-led inclusive growth, the government plans to promote gender equality as well as women’s economic empowerment and financial inclusion, on which it will host a conference jointly with the IMF and UN on May 8-9. With concerted efforts and far-reaching reforms, growth is expected to accelerate gradually in the medium term.

“During the visit, the mission met with the President Evaristo Carvalho; Prime Minister Jorge Bom Jesus; Minister of Planning, Finance, and the Blue Economy Osvaldo Vaz; Minister of Foreign Affairs Elsa Pinto; Minister of Infrastructure Osvaldo Abreu; Governor of the Central Bank Américo Soares De Barros; President of the National Assembly Delfim Neves; President of the Príncipe Autonomous Region José Cassandra; the Parliamentary Economic Commission; other government officials; representatives of the private sector including banks; and development partners. The mission expresses its deep appreciation to the authorities for their cooperation and policy dialogue. It looks forward to active and continued dialogue in the future.”

[1] The ECF program is a lending arrangement that provides sustained program engagement over the medium to long term in case of protracted balance of payments problems. The recent program for São Tomé and Príncipe (SDR 4.4 million, about US$6.2 million or 60 percent of quota) was approved by the IMF Executive Board on July 13, 2015 (see Press Release No. 15/336) and expired in end-2018.